No-cost EMI may sound attractive. But here is a catch

During the festive season, many companies and online retailers come up with no-cost EMI schemes.

Here are some important things you must know about no-cost EMI

What is no-cost EMI

When you choose no-cost EMI or zero-cost EMI to make a purchase, it means you will pay monthly instalments for that product but will not be charged any interest or fees. Sahil Arya, Co- Founders and Directors at Fat Tiger said that this implies that you will only pay the product’s full price, divided into EMIs. “The interest component and the processing fees are included in your standard or regular EMI amount. Equated Monthly Installment (EMI) is a fixed payment amount made by a borrower to a lender on a specified date each calendar month. Equated monthly instalments are used to pay off both interest and principal each month, so that the loan is paid off in full over a specified number of years,” said Sahil Arya.

Ridhima Kansal, Director, Rosemoore said it gives buyers a certain degree of flexibility and deepens their overall pocket.

“The fees for the loan are either borne by the borrower as an EMI loan, or by the retailer as MDR (merchant discount rate) in the case of no-cost EMI loans,” Anil Pinapala, CEO & Founder of Vivifi India Finance.

Why do customers prefer no-cost EMI 

Raghunandan Saraf, founder and CEO of Saraf Furniture said customers prefer no-cost EMI when purchasing expensive items and paying the price in instalments. “No-cost EMI loans can be useful if you are purchasing an expensive item and do not wish or are unable to pay the entire amount at once,” Raghunandan Saraf said.

What’s the catch with the no-cost EMI?

According to Nidhi Aggarwal, Founder, SpaceMantra the no-cost EMI only applies to the full amount and this takes away the benefits of discounts which would be available otherwise when payment is done fully. 

When compared to the normal EMI, the no-cost EMI does strip away some basic advantages and the common suggestion is to pay in full. Apart from no discounts, the no-cost EMI also levies some processing charges which itself voids the benefits of a lesser price, she said.

She further summed up that all in all, one should pay in full to get the discounts and ignore months of payment anxiety for a better deal.

“No cost emi schemes are not really “no cost” but have hidden charges such as processing fees and opportunity costs such as discounts otherwise available on lumpsum purchase not being made available under this option. . A customer should ideally compare the implicit interest rate on no cost EMI option and the explicit interest rate on a emi option to decide on the best choice,”  said Vivek Iyer, Partner, Grant Thornton Bharat.

No-cost EMI vs EMI

Vikas Garg, Co-founder & CEO, Paytail says the vital difference between the no cost EMI scheme and the Normal EMI scheme is that your regular EMI’s consist of the cost of the product plus interest as well as processing fees. The no cost EMI’s only consist of the price of the product.

Vikas Garg, Co-founder & CEO, Paytail lists out the plethora of benefits offered by no-cost EMI

1) Manage cash flow constraints

No-cost EMI’s support the purchase of high-value ticket items where you can take your favorite product home without paying anything upfront.

2) Build your credit score

You can easily build on your credit score through small ticket sized loans, by effectively repaying them on time.

3) Flexible repayment tenures

The consumer can also decide what repayment tenure suits them and repay their loan accordingly.

Several banks offer no-cost EMI facilities in different options. While going for a no-cost EMI, you can choose different repayment tenures per your need. It can range anywhere from 3 months to 24 months.